Deflationary risk and a top-down extension of the collective behavior in markets

A deflationary risk is looming over the US. Deflation could take huge proportions, last years and cost a lot in terms of quality of life for many. With the unprecedented debt levels of the US [Godley, 2003], it is probable that the familiar monetary and fiscal remedies would fail. Indeed, a big problem is that policy interventions such as lowering interest rates, reducing taxes, government spending packages (including lavish war expenditures) and any measure to restore investors' confidence may be much less effective than expected, as discovered with the Japanese so-called liquidity trap, which is as we said a process in which government and the central bank policy becomes essentially useless. In addition, loss of confidence by investors may lead to a non-negligible cost to the overall economy, providing a positive feedback reinforcing the bearish climate.